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THE SPEAKERPHONE MENACE

April 23, 2004

A Tax Court case issued yesterday gives all tax preparers a valuable lesson: if you call a client with an IRS agent in your office, don't use the speakerphone.

Padgett C. Price's CPA prepared tax returns for her law practice based on the business bank account checkbook. As it turns out, some firm income was deposited into Ms. Price's personal Merrill Lynch cash management account. As the CPA was unaware of these deposits, the income was not reported on the law practice tax returns.

The IRS agent examining the law practice got wind of the Merrill Lynch accounts and asked the CPA for them. The CPA got on the speakerphone to the client, Ms. Padgett. The client, unaware the agent was listening in, declared that the IRS would never get the Merrill Lynch records.

Things went downhill from there. Ms. Price was convicted of criminal tax fraud, was disbarred, and yesterday the Tax Court upheld civil fraud penalties against her.

Was the speakerphone the problem? The real problem was skimming the law practice income and not reporting it, compounded by clumsy attempts to cover it up. Still, the speakerphone incident didn't make it less likely that the agent would refer the case to criminal investigators.

Link: Padgett Coventry Price (pdf format)

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